The oil-in-the-$20s club just got a new member. But Morgan Stanley’s case for another leg lower has less to do with a global glut of crude than it does with a strengthening U.S. dollar.

In a Monday note by analysts including Adam Longson, head of energy commodity research, Morgan Stanley argues that traders have put too much of the blame for recent weakness in commodities, especially oil, on market fundamentals. Instead, they contend that the primary driver over the last several months has been a strengthening U.S. dollar.

Oil futures last week tumbled to their lowest levels in more than a decade, extending a selloff that has seen West Texas Intermediate crude
CLG6, +0.00%
the U.S. benchmark, and Brent
UK:LCOG6
the global benchmark, drop by around 70% from their mid-2014 highs.

And with China likely to further devalue its yuan currency and the Federal Reserve in tightening mode, further dollar strength seems likely, the analysts said.

While oil markets are undoubtedly oversupplied, after a certain point, deteriorating fundamentals have little to do with the price action. “Oversupply may have pushed oil prices under $60, but the difference between $35 oil and $55 oil is primarily the USD (U.S. dollar), in our view,” they wrote.

That’s because there is “no intrinsic value” for crude oil in an oversupplied market, they argued:

The only guide posts are that the ceiling is set by producer hedging while the floor is set by investors and consumer appetite to buy. As a result, nonfundamental factors, such as the USD, were arguably more important price drivers in 2015. In fact, when we assess the [more than] 30% decline in oil since early November, much of it is attributable to the appreciation in the trade-weighted USD (not the DXY). With the oil market likely to remain oversupplied throughout 2016, we see no reason for this trading paradigm to change.

So given the prospect for further dollar appreciation, scenarios with oil in the $20 to $25 a barrel range are possible “simply due to currency”, they write.

They calculate that a 15% devaluation of the yuan would boost the trade-weighted dollar by 3.2%. In turn, that could send oil down by 6% to 15%, or $2 to $5 a barrel,” they said, which would leave crude in the high $20s. If other currencies move as well, the move could be even more pronounced, they said.

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